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Updated:         May 31, 2018

With such great emphasis on credit scoring in the loan approval process, consumers are hard pressed to know exactly what they might do to either produce or preserve a good score.

Your three digit credit score is derived via the examination and evaluation of many credit aspects. Among these is included how long you have had credit accounts, the total credit "available" (the total credit limits of all credit accounts), how much of the available credit you actually use and whether your payment pattern identifies timely payment on any used credit lines.

A logical question is "if you have credit accounts with zero balances which have gone unused for some time, should you close the accounts?" Will closing such accounts improve a borrower's credit score? Unfortunately, the correct answer is "it depends".

If, for instance, your total credit limit is high but your outstanding balances are minimal, it could improve your score. The scoring "system" might evaluate such a scenario as one who has lots of available credit, uses it judiciously while making on-time payments as demonstrating an ability to control credit usage and/or to use credit wisely.

But, depending upon the type of loan such a borrower may seek, a lender could have a different opinion. A lender reviewing a loan application with lots of available credit obviously looks at the borrower's income to determine the borrower's ability to repay credit obligations . . . what if the consumer "maxed out" all of the available credit limits?

If a borrower has a considerable amount of available credit, much of which has been recently acquired, you might be viewed as a greater risk than if you had fewer credit cards. One might be better off to apply for only a few credit cards and to use them sparingly.

Once a credit line is open, the mere act of closing it is unlikely to improve your score. In fact, if you carry a substantial balance on credit cards, closing accounts can endanger your score. Since the credit score formula takes into account the amount of credit you have available and the amount of actual use, closing unused accounts could make it appear that the balance carried is disproportionate and result in reducing your credit score. Paying down or paying off credit card debt, on the other hand, can improve your score.

Your score could also be adversely affected by closing an account that you have had for a long time. A lengthy credit history can sometimes help your score. That does not mean that one should never close a credit card account. What is so confusing is trying to strike that balance between enough but not too much credit.

Having too many cards can create several potential difficulties, especially for anyone who has any trouble controlling expenditures. Closing, at least, some of those accounts may prove beneficial even if temporarily it impacts your credit score.

While department store charge cards can be a way for people to initiate credit, having a lot of such cards generally does not improve your score. They tend to be easier to acquire and thus don't enhance the credit score as much as the harder to get cards issued by major lenders.

Here are some strategies when considering closing accounts:
1. One of the best things you can do is not carry a balance on any credit card. In other words, use the card(s) and pay the balance monthly. When an account has a zero balance, you can close it at any time.
2. If you do carry a balance on any card, do not close accounts just prior to applying for a mortgage loan. Wait until you are approved for your loan.
3. Don't cancel an account that still has a balance. Pay it off or transfer the balance to another card. It may take a month or two to acquire a statement identifying that you have paid all the charges, including interest and/or fees.
This raises the question of whether you should transfer high interest rate accounts to lower interest rate bearing cards? While it may make good "business sense", doing so too frequently could negatively impact your score. It could easily appear that you are acquiring too much "new" credit and the old accounts may not yet be reported as paid in full.
4. If choosing between old accounts and department store and/or newer credit accounts, close the latter first.
5. When closing an account, call each company and determine how they want you to close the account. If you are a preferred customer, the company may even offer you a better interest rate or terms and you might decide to retain the account. If you do cancel, ask that the company report to the credit bureaus that the account was closed "at your request". Ask for confirmation, in writing, that the account was closed, and retain it. Disputes do occur and you may need the proof in the future.

If you intend to seek a real estate loan (either a purchase or refinance loan) it is advisable to acquire a credit report and discuss it with your lender. Credit scoring remains a bit of a mystery. If you are going to seek financing, it is wise to establish a strategy with your lender regarding any anticipated changes in your credit history or usage.

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